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Association of State Floodplain Managers
Phoenix, AZ * June 21, 2018
Presented by: Jennifer C. Gerbasi, CFM
Terrebonne Parish Planning and Zoning Department
Recovery Assistance and Mitigation Planning Division
“What we have here is a failure to communicate.”
Flooding:
happens in a desert
happens on mountains
happens in the city
happens in the suburbs
happens outside the special flood hazard area
may be above the Base Flood Elevation – BFE compliance is not a promise the structure won’t flood
properties in or out of SFHA only part of the equation
2
Flood Insurance Is REQUIRED for every structure in the floodplain with
a federally backed loan
May be required by outside the SFHA by mortgagors
Mortgage companies have failed to require as many as 20-40% of borrowers to get or maintain insurance
Anyone in an NFIP participating community not explicitly excluded CAN buy flood insurance for a price
Private insurance is available
Grandfathering may stabilize a premium downplaying the risk and potential costs to the buyer
3
Building to the base flood elevation New construction
Substantial Improvement
Substantial Damage
4
Encouraging better new building or retrofitting/mitigation NFIP steep
individual discounts for freeboard
$1,050 $3025
Encouraging better new building or retrofitting/mitigation Community Ratings System community-wide flood
insurance discounts for:
Freeboard (built height above the base flood elevation)
Limits on building in the special flood hazard area
Limits on fill/Compensatory storage in the SFHA
6
Private Efforts to Reduce RiskBuilders experimenting with freeboard to:
Add value to the client through lower costs
Distinguish their structures from others
Enable more efficient use of scarce property by building an elevated foundation and avoid mitigation
Request for grants to pay for the difference in cost while the market adjusts to reflect the safety value
Building to the safer standard is a loss of profit
7
Private investment in flood safety not supported by current lending In many cases there is an upfront cost to the buyer
Mortgage companies and appraisers show no recognition of the increased cost or value of flood safety other than presence in or out of the SFHA.
There is no valuation increase in appraisals for extra safety margins that reduce risk.
8
Storm Safety Impact on ValueStudies have shown that:
Properties in the SFHA Have a value 6-7% less than other zones based on comp
sales Based on the flood zone and not compliance or
additional safety Lack of storms decreases delta between SFHA and not
Fortified HomeTM
construction for wind Adds ~7% value to a structure according to studies
No studies have been performed to identify a value due to increased flood safety of a structure
9
Freeboard Amenity ValuationAppraisal inclusion of flood
safety will enable lending
Insertion point for capturing value of flood safety
Stable, quantifiable, and relatable to mortgage
Home with 1’ FreeboardMonthly mortgage payments $1,266.71Monthly flood insurance + $793.58Total monthly cost = $2,060.29
Home with 3’ of freeboardMonthly mortgage payments $1,276.85 (+10.14)Monthly flood insurance + $564.58 (‐229)Total monthly cost = $1,841.43 (‐218.86)
10
Vermont Outreach Material
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Capitalization Method Example of Savings on NFIP Premiums*
V Zone1 A Zone2
Annual savings
30-year savings
Annual savings
30-year savings
1' freeboard $1,360 (25%) $40,800 $502 (41%) $15,060
2' freeboard $2,730 (50%) $81,900 $678 (55%) $20,340
3' freeboard $3,415 (62%) $102,450 $743 (60%) $22,290
*NFIP premiums based on May 2007 rates for a one-floor residential structure with no basement built after a FIRM was issued for the community
(post-FIRM rates differ from pre-FIRM rates). $500 deductible/ $250,000 coverage for the building/$100,000 for contents.
12
Mortgage A mortgage is a debt instrument, secured by the collateral
of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments.
A federally backed mortgage requires flood insurance:
If the structure is in the Special Flood Hazard Area, or
If the lender believes that the structure is at risk though not technically in the SFHA;
With a policy value equal to the owed on the mortgage;
Until the mortgage is paid in full.
13
Measuring Flood Safety Benefits Mortgage
Qualifying ratio may allow buyers to buy more valuable house incidentally valuing the flood safety
Qualifying ratio is the maximum ratio of debt to income
Considers the cost of the mortgage including insurances and other maintenance costs v. the buyers income
A structure that has lower insurance will have a higher ratio with the same income
Does not increase value that can legally be loaned if not captured in the appraisal
14
Measuring Flood Safety Benefits Mortgage
Qualifying ratio may allow buyers to buy more valuable house incidentally valuing the flood safety
Qualifying ratio is the maximum ratio of debt to income
Considers the cost of the mortgage including insurances and other maintenance costs v. the buyers income
A structure that has lower insurance will have a higher ratio with the same income
Does not increase value that can legally be loaned if not captured in the appraisal
15
The Intended Use of an Appraisal To facilitate the transfer of ownership of real property
To help prospective sellers determine acceptable
selling prices or prospective buyers decide on offering prices
To assist the underwriter in establishing a value of security for a mortgage loan
To provide an investor with a sound basis for the purchase of real estate mortgages, bonds or other types of securities
16
Appraisers When an appraiser considers any type of improvement
to the land, the value expected to be associated must have evidence when the value developed is a market value opinion.
That can be difficult to identify when the construction betterment is not yet tested in the market.
Flood safety is not captured in detail
Some markets capture the zone in comparative sales
17
Why is safety not captured? When there is no quantified evidence of the value
added, the appraiser must then determine if there can be a qualified judgment.
Skepticism - If it has value then why hasn’t the market acknowledged through paying a higher price?
The new idea may be too new to have been tested for the market’s willingness to pay more.
The data is not always available to be assessed
Mortgage broker looking to appraiser for value signal
Other amenities more important to the buyer
18
Challenges to Building Safety Benefits How to capture these values and encourage builders to
innovate and lenders to cooperate?
Current capture = $0 so safe building discouraged
Complaint from homebuilders that appraisals not modified to take into account greater value.
19
Recruit new actors to recognize the value of flood safety including: Assessors’ offices
Appraisers
Mortgage companies and other lenders
Real Estate Professionals
20
Promoting Private Investment by Providing
Studies of current valuation of flood safety
Tools for monetizing the value
Education across the spectrum of professions
21
StudiesStudy sales in the floodplain for value trends
Study sales with first floor elevation on EC for safety margin and value
Data sets are available through public ECs
Sales can be compared in different regions
Model: University of Alabama study on “Estimating the Effect of Fortified HomeTM Construction on Home Resale Value
22
Sample ToolsStandard Appraisal Methodologies
Market Value
Debt Coverage Ratio
Reduced to an equation
Enhanced with FEMA Benefit Cost Assessment Displacement costs per person
Business Interruption
Model: Solar valuation from Energy Sense Finance -web-based calculator for appraiser s
23
Measuring Flood Safety BenefitsAppraisal
Additional Amenity
More efficient due to durability
Less costly for lifetime maintenance
Less time away from dwelling during flood evacuation due to water not flooding interior of dwelling.
No additional time is needed for restoration
25
Direct Sales Comparison Approach Formerly known as the market data approach
Property being appraised is compared to sales of similar properties in order to arrive at a value
identifies the comparable properties as being similar in age and somewhat similar in size, quality, use, and amenities, among other considerations
adjustments to the sales price of the comps, based on how they differ from the specific property.
26
Lost in Translation to Present Value For the appraiser the total amount of savings over the 30
years does not play a role in the value of the item. The annual amount of savings is a factor of annual cost
maintenance. If discounted back to the present based on the return on the
yearly savings the amount would be far less.
1’ Freeboard Annual Cost Savings = $1,360 Discount rate of say 5% over annual payment 30 years
x 15.3725 (Pw 1/p @5%, 30 yr) Equals the current value of that savings prior to the cost of
item $20,906.53 (rather than $40,800). 51% reduction. Save one month of mortgage every 14 months – 10 over 7 yrs
27
Costs associated with freeboard Incorporating freeboard into new structures generally
adds about .25% to 1.5% to the cost of construction for
each foot of added height (NAS, 2006).
The marginal resulting increase in monthly mortgage
payments is more than offset by saving on NFIP
premiums for structures not built greater than 1’ on fill
In the A zone, the discounts are less,
and may not alone be sufficient to
draw a buyer to the safer house
($502 discounted to $218) 28
Debt Coverage Ratio Method Debt Coverage Ratio Method would be the where the
comparison of the freeboard to non-freeboard is made strictly from the savings of the Flood insurance.
The capitalization rate is developed by using local lender terms.
MP (Position of the Mortgage) .95X DCR 1.2X Amortization factor 0.0719= Capitalization Rate (R/O) 0.082 R/O
Lifetime Savings on Insurance $1360 ÷ 0.082 = $16,585.36
29
Takeaway All flood savings elements that are immutable need to
be captured to show the true value
The tool must capture the present value
It must be accessible and simple to use; and
Provide a value for that amenity that is supported by evidence
30
Freeboard Can save flood policy holders up to 62%
Savings can be projected over life of mortgage Insurance is unlikely to go down
Simple calculations identify savings over time
Value can be reduced to present value
Materials can be updated to show the savings /educate
Value is persistent and will transfer from buyer to buyer
Standardization lends itself to consistent value and reliability
31
Education through Existing ChannelsAppraisers
Elected officials
Floodplain managers
Real estate industry
Insurance companies
Banks and mortgage lenders
Builders
Consumers
32
Actions Necessary by Actor Mortgage
Current federal lending regulations* require the lender to “initiate” the appraisal
Communicate to appraisers that inclusion is expected
Accept lesser qualifying ratio if caused by additional flood safety
Accept that structure will retain value and marketability due to the innate and immutable condition of relative flood safety.
Develop Cap Rate if that is more acceptable to the industry
33
Actions Necessary by Actor Appraiser
Request information on flood safety
Elevation Certificate
Current flood insurance premiums
FEMA history
Sellers disclosure document
Include valuation like other comp amenities
Suggest this added value to lending institution with rationale for the additional value
Provide studies or access to the tool for documentation
34
Actions Necessary by Actor Floodplain management community
provide information on flood safety
Enter into Memorandums of Understanding with local or other willing lending institutions
Provide consumer advice on safe buildings and savings
Educate builders, elected officials, and realtors
35
Actions Necessary by Actor The Flood Safety Valuation Team
Create multimedia educational materials for
Appraisers
Mortgage/lending industry
Homebuilder associations
Chambers of commerce
Elected officials
The general public
36
AcknowledgmentsDiana Jacob, AQB Cert. USPAP Instructor
Smart Home America
IBHS -Fortified Homes
National Association of Appraisers
The Appraisal Institute
FEMA
FIMA
Sandy Adomatis, Appraiser
Patricia Staebler, SRA,RS
For additional information:
Jennifer C. Gerbasi
[email protected] *985-873-6565
8026 Main Street, Second Floor
Houma, Louisiana 70364
37